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Macro Morning: Treasury fret

US 10 year Treasuries hit 2% for the first time since April last year as the fear grows, at least for the bond vigilantes, that the US is on the verge of a 1994 style recovery and bond rout. Off course the corollary of that is stocks should do OK, the Aussie Dollar and Swiss Franc will be under pressure from the reduction of the safe harbour bid.

The key for the US 10’s was the Durable Goods report which printed 4.6% against 1.8% expected with the ex-Transports number a stellar 1.3% against the 0.7% expected. This more than balanced out the weakness in pending home sales which fell -4.3% against the 0.3% fall expected with the Dallas Fed manufacturing index up to 5.5 from 2.5 also helping.

No doubt a little bit of disquiet in the Treasury trader ranks is the upcoming Fed meeting this week after the last meeting plus the minutes send mixed messages to the markets.

As you can see in the chart above the recent sell off has accelerated from the six month or so up trend so the Fed meeting, its announcement and ultimately its minutes are going to be very important for the bond gurus.

Of course they are also going to be important for the stock market as well. We know that the Fed’s balance sheet growth is highly correlated with the rise and fall of stocks since 2009 so any hint that the Fed might be moving toward thinking about the withdrawal of its bond buying program will hurt stocks. It has to happen eventually if the US economy is healing, it is just a question of when.

HSBC upped German stocks to overweight over the weekend but that didn’t stop the DAX from falling 0.32%. The FTSE was up 0.15% however and the CAC rose a little up 0.08%. Milan was on a tear though with a rise of 0.96% in contrast to the 0.59% fall in Madrid.

In the US it has been an up and down session with Caterpillar and Boeing down but Apple being lifted by punter buying after the recent acute weakness. With 8 minutes before the close the S&P 500 is down 0.13% to 1500, the Dow is down 0.04% at 13,889 and the Nasdaq is 0.20% higher.

In Asia yesterday Shanghai leapt 2.43% but the Nikkei was 0.94% lower.

Just to recap on Friday’s price action the euro busted up through the top of the box after the better than expected IFO release Friday and the Aussie busted down decisively through the bottom, or at least continued recent weakness. Over the past 24 hours euro rallied up to a high of 1.3477 and sits up 1.3454 down 0.07% on the day. USDJPY hit a high of 91.25 before also retreating a little back to 90.71.

The Aussie was calmer as we were out for the Australia Day holiday making a high of 1.0430 and a low of 1.0382 and it sits down 0.03% at 1.0412 on the day. The biggest movers were the Pound and the Loonie both of which are starting to look acutely weak. Sterling fell another 0.69% and now sits at 1.5691 with the 1.60 level looking a long forgotten dream. CAD is actually up a smidge versus the USD on the day at 1.0058 but as we showed in the chart above the current level is crucial for the medium term outlook.

Gold has been lower for a few days now and fell another 0.24% last night to $1652. In truth this is no big deal as gold is simply following its multi-month down trend. Further weakness could be afoot. Silver has likewise followed gold lower and its high beta precious metal status has seen it lose 1.36% overnight. Crude remains strong rising 0.59% to $96.45 Bbl.

Corn was up 1.18%, sugar rose 2.18%, cattle rose 1.9% and cotton was on 1.02%.

We’ve used the chart above of the euro reverse head and shoulders and it is clear that so far the euro has not been able to push up through resistance. Already in Davos we have heard protestations from European policy makers about the euro’s recent resurgence and it is clear they don’t support a move higher but there is scant little they will be able to do about it if this neck line breaks. Some will be looking for a run toward 1.50.

Shorter term support is 1.3419 and resistance 1.3480/90 then 1.3500:

AUD/USD:

The Aussie it is recovering a little from being oversold on the 4 hour charts as you can see below. The break of our Darvas box has rewarded handsomely and support is now 1.0380/85 and resistance 1.0425/35 then 1.0455/65.:

Data

In Australia today its the one piece of data, well series, that you need to know what is going on in the economy when the NAB Business survey is released. Tongiht we get German confidence, Spanish retail sales and US Case Shiller House index.

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Comments

I agree that the $AUD and gold will take a hit as 10 year rates rise. Banks in the US are not releasing foreclosed stock because of the rising prices, so the housing recovery is real – YOY prices are up quite significantly in some cities.

But what is it you fear about the bond vigilantes? The Fed could alter their own buying program if they need to and force rates down, but do they want to?

gunna – the important point is that they are holding the stock back as they can see prices rising quite strongly – so by holding the stock back they will achieve higher prices, and thus either lower losses, or perhaps no losses at all.

There is an important difference between careful tactical planning and incompetence.

But on this thread I would rather discuss the bond vigilantes if that’s OK.

for sure the US recovery is very substantial, and probably overlooked, small businesses are doing much much better recently (sorry I cannot produce hard stats, we never really took advantage of our very targeted data.)

The US also faces some fiscal consolidation through the Sequestration (or whatever deal takes it’s place). That will knock say 0.5 to 1% of GDP growth.

In fact, the US should consider using tax rate increases each quarter that the unemployment rate falls, thereby taking “excess” demand out of the economy and fixing their fiscal position at the same time, rather than doing nothing on the fiscal side and forcing/allowing the fed to raise rates, possibly leading to a bond rout and putting pressure on home prices, earnings and stock PE ratio’s by making comparative yield to bonds less attractive.

The idea that monetary/interest rate policy works in isolation of fiscal policy is something that only an economist or politician could believe.

Of course MMT doesn’t see a problem with US deficits at present because there is so much underutilised capacity, but if you are a deficit hawk using fiscal policy so the FEd leaves rates low would help reduce the debt to GDP ratio, unless of course they choke GDP too hard. The ratio changes with each of GDP growth/contraction and debt level changes/deficits & surpluses.